Trying to project confidence amid uncertainty, San Francisco Federal Reserve Bank President Janet Yellin described the novel tactics that U.S. policymakers are using to prevent the worst global financial crisis in decades from sliding into a depression.
“I do not believe we are in a depression and I believe policymakers will do everything possible to make sure we don’t go there,” Yellin sais in a speech before the Financial Women’s Association of San Francisco Thursday.
Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, speaks about foreclosures to the Bay Area Council Outlook Conference in Alameda, Calif., Wednesday, April 16, 2008. Yellen said the mortgage crisis and financial services turmoil are likely to be a "major drag" on the national economy into 2009. (AP Photo/Paul Sakuma)

With no signs of immediate recovery for the economy, it is time to do more to strengthen the beleaguered housing market at the heart of the crisis, according to speakers Thursday at a conference called "The Mortgage Meltdown, Financial Markets and the Economy," jointly sponsored by UC Berkeley and UCLA.

"We have a long way to go before the credit crunch shows significant healing, and for that reason I think it is worth considering other types of policies to address the crisis," said Janet Yellen, CEO of the Federal Reserve Bank of San Francisco, addressing about 200 financial professionals, professors and students at UC Berkeley's Alumni House on the first day of the two-day conference.

Federal Reserve Chairman Ben Bernanke will address the gathering via satellite today. Speaking on a day when reports showed that the nation's economic output had shrunk by 0.3 percent in the third quarter, Yellen said the current quarter may be even worse. "It appears likely the economy is contracting significantly" in the fourth quarter, she said. She also said the central bank might cut its benchmark rate for overnight bank loans even lower than the current 1 percent but would not reduce it as low as zero.

"The effects of the growing credit crunch have outpaced the easing of policy," she said.

Serious consideration must be given to "addressing the problems plaguing the housing market directly, through increased aid to distressed homeowners to mitigate foreclosures or through broad-based incentives to boost the demand for housing," Yellen said.

She laid out some additional steps that could be taken for homeowners, such as expanded, streamlined loan modifications and government loan guarantees for modified mortgages under the $700 billion bailout bill.

The Bush administration is now considering a plan to aggressively reduce payments for up to 3 million troubled borrowers, modeled on the Federal Deposit Insurance Corp.'s approach to IndyMac mortgages, according to news reports. The $40 billion to $50 billion cost of that initiative would come from the bailout package.

Another way to avoid "the deadweight losses and negative community spillovers of foreclosures" would be a program modeled on the Depression-era Homeowners' Loan Corp., in which the government would buy underwater mortgages - now estimated to be 15 percent of total mortgages - and refinance them at a lower rates, Yellen said.

Another approach to helping the housing market would be to boost home buying by making new mortgages cheaper through low-cost government loans or tax credits, Yellen said.

While home prices do need to adjust, the worry is that they may overcorrect, which "could have devastating effects," she said.

Yellen and other speakers warned that foreclosures have already spread beyond subprime loans for borrowers with poor credit to alt-A loans (to borrowers with better but not ideal credit profiles), and even to prime adjustable-rate mortgages.

A rise in foreclosures on 2007 mortgages is particularly sobering because most were made with tighter underwriting standards, she said.

This month's financial turbulence possibly has had a direct impact on home buying, said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage Corp. "Recovery (in home buying) ... will largely be eroded because of the diving of the stock market and volatility of markets in general actually hitting people's pocketbooks causing them to back away from home buying."

Although many of the speakers, who included economics professors, Fed officials and consumer advocates, agreed that widespread loan modifications would be desirable, one speaker said bluntly that they are unlikely to work.

"I do not think restructuring can be done in a way that helps a lot. The brute fact is that home prices have dropped 20 percent from their peak ... property values are low and falling. To what extent are you postponing what's going to happen? Would it not be better to get it over with quick?"